The protocol of a turnaround manager: this peek into a turnaround pro's playbook reveals the initiatives directors themselves can take to preempt the call for help.

• Author: Midanek, Deborah Hicks
• Position: CRISIS MANAGEMENT

CHANGE IS A CONSTANT, surprises happen all the time, and directors need to be sure they are well positioned to protect the health of the company for which they are responsible. Fine, you say, but how can we predict the future?

As a veteran turnaround manager, one who has spent her life in the returns department, I believe there are several actions boards can take routinely to reduce the likelihood of needing to call me. In most cases, by the time I arrive, options are few, much value has been lost, and the board feels helpless.

This article focuses on lessons from turnaround management practices that directors can adopt to reduce the likelihood of unwelcome surprises coming from inside the company, and to increase their preparedness to handle discontinuous events arising from any quarter. In other words, to avoid having to face the need for a turnaround manager, be your own--and, most important, do this regardless of whether there is an apparent problem or not. When things look too good they often are, and early recognition of possible trouble is the most important component involved in fixing it.

1. Understand the cash

   In almost 30 years of working with troubled companies, I have never yet seen a company that has a good understanding of its cash. Executive time is typically spent on important bank and capital market relationships, and on financial reporting. Cash management is typically a clerical function, not part of regular management scrutiny. The board, not burdened with daily running the business, can assist on this, and through this continuing process help both management and board better understand the company's business dynamics. Greater understanding of the critical drivers of cash through the business leads to greater confidence when the unexpected inevitably occurs.

   How to do this? The first thing a turnaround manager does on arrival in a new situation is to figure out as fast as possible how much cash there is, where it is, and who has what claims on it, typically working from the general ledger and actual receipts and disbursements. A rolling cash flow forecast is typically created, covering, for example, 16 weeks forward, and including receipts, disbursements, use of working capital, and taking into account major debt and capital expenditure payments.

   Understanding the flow of cash allows the turnaround team to estimate how much time there is to identify and address sources of difficulty, and how broad the range of possible options might be. In one recent subprime mortgage originator situation, I arrived at a company that had $600 million in cash on its books and a board comfortable they had the resources to withstand the storm. On a quick look, all but $15 million of that cash was encumbered, payroll was in jeopardy, and an immediate filing was inevitable. A company can appear to have more than adequate resources when looked at on a financial reporting basis, but GAAP interpretation can often disguise the availability of cold hard cash. It is a very good discipline for that cash flow forecast, and related "flash reports" on key variables the board wants to track, to become part of every board package.

   The next thing the turnaround manager does is work on creating an integrated financial model, tying the cash flow to profit and loss and to the balance sheet. Typically, financial and management reports are periodic snapshots and do not focus on...